Wall Street slightly soured on tech stocks in 2022 as an economic downturn saw the Nasdaq-100 Technology Sector index plunge 40% during the year. However, investors have grown bullish about the industry again, thanks to exciting prospects in sectors like artificial intelligence (AI) and cloud computing.
As a result, the same index is up 51% year over year. Investors have rallied over the "Magnificent Seven," a phrase used to describe the seven most influential companies in tech. The seven include Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia (NVDA 6.18%), and Tesla.
These companies are investing heavily in AI, an industry projected to expand at a compound annual growth rate of 37% through 2030. Meanwhile, chipmaker Nvidia has seen exponential growth over the last year as its graphics processing units (GPUs) have become the gold standard for AI developers worldwide.
Nvidia's stock is up 245% since last March. However, earnings per share (EPS) estimates indicate it has much more to offer as the AI market develops. Here are three reasons to buy this Magnificent Seven stock before it rises 40%.
1. Nvidia has carved out a lucrative spot at the top of AI
Nvidia achieved an estimated 80% to 95% market share in AI GPUs last year. The company's massive success in the industry motivated several tech firms to venture in, as well. In 2024, AMD and Intel began shipping new AI GPUs specially designed to challenge Nvidia's offerings. However, Nvidia has pulled so far ahead in the industry that it's unlikely to lose its dominance any time soon.
In its most recent quarter (the fourth quarter of 2024, which ended in January), the company's revenue increased by 265% year over year to $22 billion. Meanwhile, operating income jumped 983% to nearly $14 billion. This monster growth was primarily thanks to a 409% increase in data center revenue, reflecting a spike in AI GPU sales.
In addition to soaring earnings, Nvidia's free cash flow is up 430% in the last year to more than $27 billion, significantly higher than AMD's $1 billion and Intel's negative $14 billion.
Despite new GPU releases from both competitors, Nvidia's head start in AI potentially pushed it further ahead with greater cash reserves to continue investing in technology and retain market supremacy.
2. Trading at its best value in 12 months
Despite a soaring stock price, Nvidia's stock has increased in value over the last year.
Data by YCharts. PE Ratio = price-to-earnings ratio.
The chart above shows that Nvidia's price-to-free-cash-flow and price-to-earnings (P/E) ratios plunged in the last year, indicating its stock is at one of its best-valued positions in 12 months.
P/E is calculated by dividing a company's stock price by its earnings per share. Meanwhile, the price-to-free-cash-flow ratio divides its market cap by free cash flow.
These are helpful valuation metrics as they take into account a company's financial health. For both, the lower the figure, the better the value. Nvidia's declining figures indicate that now could be the best time to consider adding its stock to your portfolio.
3. Earnings-per-share estimates show Nvidia's stock will continue beating the S&P 500
As a leading chipmaker, Nvidia has a powerful position in tech. In addition to supplying its hardware to AI developers, the company's chips can be found powering a wide range of devices, from cloud platforms to video game consoles, laptops, custom-built PCs, and more. While a spike in AI GPU sales is mainly responsible for Nvidia's stellar financial growth over the past year, the company has also benefited from a recovering PC market.
According to Gartner, PC shipments popped 0.3% in Q4 2023, marking the first such increase in over a year. Market improvements have been reflected in Nvidia's sales, with its PC-centered gaming segment reporting a 56% year-over-year rise in revenue in its latest quarter.
A leading role in AI and a recovering PC market suggest that Nvidia has a strong outlook in the coming years. EPS estimates seem to support this.
Data by YCharts.
The table above shows Nvidia's earnings could hit close to $35 per share by fiscal 2026. Multiplying that figure by its forward price-to-earnings ratio of 36 yields a stock price of $1,252.
Considering the company's current position, that projection would see Nvidia's stock rise 41% over the next two years. The company may not replicate last year's growth but would still beat the S&P 500's 23% growth since 2022. As a result, Nvidia still has much to offer new investors and is a Magnificent Seven stock worth considering right now.
